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holding that § 1334(b) jurisdiction existed over an interpleader action through which unsecured creditors could obtain funds that "would reduce or eliminate claims" against a bankruptcy estate "thereby reducing the number of unsecured creditors"
Summary of this case from TD Bank, N.A. v. SewallOpinion
CASE No. 01-CV-0853 W (NLS).
May 25, 2001
ORDER TRANSFERRING MATTER TO UNITED STATES BANKRUPTCY COURT, SOUTHERN DISTRICT OF CALIFORNIA
On April 24, 2001 Plaintiff Richard E. Shaw Associates ("Plaintiff") filed an interpleader complaint in California Superior Court, County of San Diego, North County Division, Vista Regional Center ("Superior Court") and deposited $20,000 with the Superior Court registry. Plaintiff claims no interest in the funds but is aware that there are numerous competing claims to the funds alleged by various parties. On May 17, 2001 Defendant internal Revenue Service ("IRS") timely removed the action from Superior Court to this Court pursuant to 28 U.S.C. § 1442 and 1444. The Court, having conducted considerable research into the merits of Defendant's removal, elects to TRANSFER this matter to the United States Bankruptcy Court for all further proceedings.
I. BACKGROUND
The Court takes judicial notice of the following facts in Plaintiff's interpleader complaint filed April 24, 2001 with the Superior Court, Case No: 1N012278: The events unfold as follows: Defendant Robert Santoni ("Santoni") had the power to control and transfer funds for both Defendant Pointe De Sante and Defendant Heahhpoint Inc. ("Healthpoint). Defendant Pointe De Sante is an entity which bills and receives funds for Defendant Healthpoint's business. On April 9, 2001 Defendant Healthpoint initiated Chapter 11 bankruptcy proceedings, (Case No: 01-03706 LA 11) in the United States Bankruptcy Court, Southern District of California. On March 15, 2001 Defendant Santoni retained Plaintiff to provide management and administrative services. On March 19, 2001 Santoni requested Plaintiff to contact the IRS concerning amounts owed by Healthpoint.
On the same day, the IRS served Plaintiff with a notice of levy claiming that Healthpoint owed at least one million dollars to the IRS. On March 23, 2001 Defendant Department of Labor informed Plaintiff that Healthpoint had previously failed to make its employees' 401K contributions. Santoni then delivered a $20,000 check to Plaintiff dated March 23, 2001 with instructions to submit the check to Great West Life Annuity Insurance Company ("Great West") to fund the employee's 401K plans. Great West administers the 401K plan on behalf of Heathpoint employees. (Account #930997-01). Although the check was given to Plaintiff, Santoni's check was made payable to the Richard Shaw Trust. Moreover, the check was drawn on Santoni's Pointe De Sante bank account. On April 9, 2001 Healthpoint commenced its bankruptcy proceeding with the United States Bankruptcy Court. Santoni subsequently demanded that Plaintiff return the funds in Santoni's individual capacity notwithstanding the fact that the check had originally been drawn from Pointe De Sante's bank account. On April 13, 2001 Santoni repeated the demand in writing. On April 24, 2001 because the Plaintiff was unable to determine the validity of Defendant's conflicting demands and unaware of which entity the funds properly belonged, Plaintiff filed this interpleader action in Superior Court (Pl.'s Compl. ¶ 2-13.) Defendant IRS subsequently removed to this Court.
II. LEGAL STANDARD
It is well established that a federal court cannot reach the merits of any dispute until it confirms its own subject matter jurisdiction. See Steel Co. v. Citizens for a Better Environ., 523 U.S. 83, 94 (1998). "Without jurisdiction the court cannot proceed at all in any cause. Jurisdiction is power to declare the law, and when it ceases to exist, the only function remaining to the court is that of announcing the fact and dismissing the cause." See id. (quoting Ex parte McCardle, 74 U.S. (7 Wall.) 506, 514, 19 L.Ed. 264 (1868)). Accordingly, federal courts are under a continuing duty to confirm their jurisdictional power and are "obliged to inquire sua sponte whenever a doubt arises as to [its] existence . . ." Mt. Healthy City Sch. Dist. Bd. of Educ. v. Doyle, 429 U.S. 274, 278 (1977) (citations omitted); see also FED. R. Civ. P. 12(h)(3) ("Whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action."); Augustine v. United States, 704 F.2d 1074, 1077 (9th Cir. 1983); Franklin v. Oregon State Welfare Div., 662 F.2d 1337, 1342 (9th Cir. 1981).
III. ANALYSIS
The narrow issue before this Court is whether the competing claims for the interpleader funds arise out of or are related to the Healthpoint's pending core bankruptcy proceedings. It is undisputed that third party Healthpoint is currently engaged in a Chapter 11 proceeding before the United States Bankruptcy Court for the Southern District of California. It is well-settled that "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 . . . and may enter appropriate orders and judgments." 28 U.S.C. § 157(b)(1) (emphasis added). Furthermore, "(a] bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11." 28 U.S.C. § 157(c)(1) (emphasis supplied). "In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." Id. For several reasons this Court finds that this interpleader action is related to the core proceedings of Heahhpoint's Chapter 11 petition such that transfer of this action is warranted under law.
A core proceeding is seen as something that will have an effect on the administration of a Chapter 11 petition. "The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy." In re Feitz, 852 F.2d 455, 457 (9th Cir. 1988) (citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)). "An action is related to bankruptcy if the outcome could after the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate."Id. In this case, Santoni's actions will clearly impact the administration of Healthpoint's Chapter 11 petition. It is undisputed that Santoni had the authority to transfer substantial funds on Healthpoint's behalf through both Pointe De Sante and later Plaintiff Richard E. Shaw and Associates. This implicitly suggests that Santoni knew or should have known of Healthpoint's precarious financial condition. At minimum, the timing of the fund transfers suggests that Santoni knew that Healthpoint was in serious financial straits and may seek bankruptcy protection.
The pleadings reveal that on March 23, 2001 Santoni transferred $20,000 from his Pointe de Sante account to pay Healthpoint employee 401K deficiencies. Notably, Santoni made the check payable to Richard Shaw Trust instead of writing it directly to Great West Life and Annuity Insurance Company, who administers Healthpoint employees' 401K funds. The Richard Shaw Trust retained the $20,000 for 33 days before Plaintiff, acting on behalf of the Richard Shaw Trust, filed this interpleader action in Superior Court. Only 15 days after transferring the funds to the Robert Shaw Trust, Healthpoint filed bankruptcy. Santoni subsequently demanded the Trust return the funds to him in his individual capacity. When no action was taken by Robert B. Shaw Associates, Santoni submitted a written demand for the funds on April 13, 2001. On the allegations presented, the Court concludes that the conduct underlying this dispute is directly related to the Healthpoint core bankruptcy proceedings.
The Court notes that on May 23, 2001 Defendants Pointe De Sante and Robert Santoni filed a disclaimer of interest on the interpleader funds. The Court is still concerned about the events as the unfolded in the matter.
The United States Bankruptcy Court is the proper place to exercise jurisdiction over this interpleader action. 28 U.S.C. § 1334(b). "Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C.A. § 1334(b) (West 2000). In the present case, some of the interpleader fund beneficiaries, such as Heathpoint's 401K participants, are likely unsecured creditors of Healthpoint. Should the unsecured 401k participant collect any portion of the interpleader funds at issue here, such payments would reduce or eliminate claims against the Healthpoint bankruptcy estate thereby reducing the number of unsecured creditors. This principle was similarly iterated in Nationwide Mutual Fire Insurance Co. v. Eason, 736 F.2d 130 (4th Cir. 1984) which held that an interpleader action over a previously purchased bond was related to a core bankruptcy case. In confirming the bankruptcy court's jurisdiction over the matter, the Fourth Circuit noted that if the bond beneficiaries were paid then this "would reduce the unsecured claims against the estate thereby giving the remaining unsecured creditors a larger share of . . . estate." Id. at 133. Like Eason, the bankruptcy court is better suited to adjudicate this interpleader.
In addition, 28 U.S.C. § 157(b)(2)(K) specifically states that core proceedings are to include "determinations of the validity, extent, or priority of liens". 28 U.S.C.A. § 157(b)(2)(K) (West 2000). This statute clearly gives the bankruptcy court jurisdiction to determine priority and validity of liens when it comes to Chapter 11 petitions. Here, the IRS currently retains a standing tax lien on Healthpoint's assets in excess of $1 million dollars. (Pl.'s Compl. ¶ 9.) Additionally the IRS is claiming a share of the interpleader funds as part of those assets. The Court finds that accurately determining the lien's priority and whether portions of the lien can be satisfied by the interpleader funds directly relates to the Heahhpoint's core bankruptcy proceeding. Therefore this matter should be properly resolved in bankruptcy court where there is clear jurisdiction and authority to do so under 28 U.S.C. § 157(b).
In sum, this Court finds that the bankruptcy court is (1) authorized, (2) better equipped and (3) proper jurisdiction to resolve this $20,000 interpleader action. With Healthpoint's Chapter 11 petition already pending before the bankruptcy court, the parties' actions clearly need to be examined in adjudicating the priorities of Healthpoint's estate. Finally, determining the priority and validity of the IRS's tax lien on Heathpoint's Chapter 11 estate also directly impacts bankruptcy court's ongoing proceedings.
IV. CONCLUSION AND ORDER
The Court having thoroughly reviewed the pleadings on file and the allegations of the parties ORDERS this matter TRANSFERRED to United States Bankruptcy Court, Southern District of California for all further proceedings. The Court finds this matter is directly related to the core proceeding in Bankruptcy Case No. 01-03706LA 11. Upon transfer the Clerk of the Court shall close the district court case file.
IT IS SO ORDERED.